During a call to discuss first-quarter earnings, Extended Stay America President and CEO Jonathan Halkyard confirmed the company is still considering structural alternatives but wouldn’t comment on exactly when the changes might occur.
CHARLOTTE, North Carolina—Extended Stay America executives say they remain focused on franchising efforts and better serving ESA’s core extended-stay guests despite a weak first quarter industrywide as they continue considering all possible alternatives, including a potential change to the company’s corporate structure.
In August, President and CEO Jonathan Halkyard first confirmed Extended Stay America was publicly exploring all possibilities to create additional value for shareholders, including structural alternatives. In February, the company suspended buying back stock in the fourth quarter as corporate structure discussions continued.
On ESA’s first-quarter 2019 earnings conference call Thursday, Halkyard reiterated the company’s current standing and ongoing suspension of share repurchases, but when asked directly if any structural changes were imminent by the end of the year or early 2020, he said, “I really don’t want to speculate on that.”
In the interim, Halkyard said Extended Stay America is unlikely to affiliate with another brand system while the company considers restructuring or if ESA opts not to make a structural change.
“Setting aside questions or pursuit of development unit expansion, franchising and corporate structure, we believe there are a number of opportunities for us to create value within the core business. Some of those are innovations within our business model itself, and some are continued improvements in our pricing and sales activation process,” Halkyard said.
“In terms of affiliation with outside brands, I don’t think that that’s something that is a meaningful opportunity for value creation right now. We spent a few years before and after going public consolidating from five brands down to one, and then investing in the Extended Stay America brand both through renovations as well as through our marketing activities—improving the website, the loyalty program and so on.
“We believe the ESA brand is a healthy one and haven’t really considered any kind of short- or medium-term brand affiliation.”
For the quarter, ESA reported comparable systemwide revenue per available room decreased 1.6% to $46.74, as a 1.6% occupancy increase to 71.4% was offset by a 3% drop in average daily rate to $65.50, according a company earnings release. Adjusted earnings before interest, taxes, depreciation and amortization decreased 12% during the first quarter to $116.3 million.
CFO Brian Nicholson described the first quarter as “challenging,” but noted excluding the disruptions from portfolio renovations and from hurricane comps in Q1 2018 in Houston and Florida, ESA increased RevPAR by 1.5% during Q1 2019. Nicholson also said despite April RevPAR dipping 0.7%, in the two weeks before Easter, the company grew RevPAR by 2.5%.
Nicholson said ESA expects full-year comparable systemwide RevPAR to range between flat and 2% growth, and adjusted EBITDA should fall between $560 million and $580 million.
As of press time, ESA’s stock was trading at $17.75 per share, up 13.9% year to date. The Baird/STR Hotel Stock Index is up 17.9% for the same period.
Franchising and extended-stay competition
Through 31 March, ESA has 554 owned hotels with a total of 61,486 guestrooms in its portfolio, and during the quarter its pipeline grew 5% and comprises 60 hotels with an approximate total of 7,300 guestrooms. The company even opened its first franchise conversion property in early April in Houston, the 115-room Extended Stay America Houston IAH Airport, which is owned by Dallas-based Provident Realty Advisors.
In 2018, ESA franchised 70 hotels, and Halkyard said the company will continue to add franchise properties in 2019 but likely a lower number of properties than the previous year.
“There’s no question that demand exists for these hotels for our current franchisees and other groups,” he said. “I don’t believe we’ll do as many in 2018, which was 70 hotels, but we’ve said we’d do 150 by 2021, and we’ll get there by doing 30 to 50 hotels this year to kind of pick a range. It will be more than zero but less than the 70 we did last year.”
Halkyard praised the strength of the extended-stay segment even as one analyst asked about the competition from WoodSpring Suites and other players.
“While it is certainly true that Woodspring has been successful in adding units over the past 12 months or so, and there are some other competitors that have also added supply in more upscale extended-stay segment, our experience on the ground has continued to be a positive one competitively, and that’s for a couple of basic reasons,” Halkyard said. “One is that we cater to and go after a market that neither WoodSpring nor some of the upscale extended-stay players really go after. That’s our core guest, a business traveler staying a few days to a few months.”
ESA’s portfolio is also uniquely positioned geographically, which is something its competitors can’t match, Halkyard said.
“Our competitive position is strengthened considerably by the locations that our assets have,” he said. “This is a portfolio that was largely built out 15 to 20 years ago in locations that are really unobtainable particularly for somebody who is going to compete in extended-stay in our segment. All of this is evidenced by our occupancy levels as well as our business mix.
“We’re not dismissing the competitive impact, we agree that there’s a market opportunity here for new extended-stay supply, and that’s why we are participating in that.”
Correction, 2 May 2019: This story has been updated to clarify Jonathan Halkyard’s comments about Extended Stay America’s consideration of potential changes to its corporate structure.